UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

            [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2007
                                                 --------------

                        Commission file number 000-25831

                              NetWolves Corporation
        (Exact name of small business issuer as specified in its charter)


           New York                                       11-2208052
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)


                  4805 Independence Pkwy, Tampa, Florida 33634
                    (Address of principal executive offices)

                                 (813) 286-8644
              (Registrant's telephone number, including area code)

                                      None
   (Former name, former address and former fiscal year, if changed since last
                                    report)

Indicate by checkmark  whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

Yes  X    No
    ---      ---

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes _ No X -

Indicate the number of shares  outstanding of each of issuer's classes of common
stock as of the latest practicable date:


      TITLE OF CLASS                          NUMBER OF SHARES OUTSTANDING ON
------------------------------
Common Stock, $.0033 par value                         May 11, 2007
                                                       -------------

                                                        34,309,713
                                                        ----------



Transitional Small Business Disclosure Format (check one):   Yes [  ]   No [X]

<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES


                          FORM 10-QSB - March 31, 2007





                                      INDEX

<TABLE>
PART I - FINANCIAL INFORMATION
<S>                                                                                                        <C>


      ITEM 1 - FINANCIAL STATEMENTS

      CONDENSED CONSOLIDATED BALANCE SHEETS

           March 31, 2007 (unaudited) and June 30, 2006 .................................................. 1 - 2

      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine
           months ended March 31, 2007 (unaudited)
             and March 31, 2006 (unaudited)............................................................... 3 - 4

      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended
           March 31, 2007 (unaudited)
             and March 31, 2006 (unaudited) .............................................................. 5 - 6


      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ............................................... 7 - 21

      ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
                 OF OPERATION ............................................................................22 - 31

      ITEM 3 - CONTROLS AND PROCEDURES ....................................................................  32



PART II - OTHER INFORMATION


      ITEM 1 - LEGAL PROCEEDINGS .........................................................................   33

      ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ............   33

      ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ...........................................................   33

      ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......................................   34

      ITEM 5 - OTHER INFORMATION .........................................................................   34

      ITEM 6 - EXHIBITS...................................................................................   34

SIGNATURES ...............................................................................................   35
</TABLE>
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       March  31,             June 30,
                                                                                          2007                  2006
                                                                                   -----------------        ------------
                                                                                      (Unaudited)
<S>                                                                                     <C>                 <C>
ASSETS

Current assets
     Cash and cash equivalents                                                          $   828,855         $  2,016,156
     Accounts receivable, net of allowance of $711, 765 and
     $1,146,044 at March 31, 2007 and June 30, 2006, respectively                         2,577,234            2,825,679
     Inventories                                                                            313,023              302,562
     Prepaid expenses and other current assets                                              480,507              367,808
                                                                                   -----------------        ------------
               Total current assets                                                       4,199,619            5,512,205

Property and equipment, net                                                                  93,804              148,620

Identifiable intangible assets, net                                                         626,924            1,192,043

Goodwill and other indefinite lived intangible assets                                     3,801,973            3,793,072

Other assets
                                                                                            125,252               78,222
                                                                                  -----------------        -------------
               Total assets                                                       $       8,847,572        $  10,724,162
                                                                                  =================        =============

            See notes to condensed consolidated financial statements
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS


(Continued)
                                                                                      March 31,               June 30,
                                                                                        2007                    2006
                                                                                    --------------         -------------
                                                                                      (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Accounts payable and accrued expenses                                            $   5,317,184         $   5,755,385
    Deferred revenue                                                                     1,101,095               538,267
    Current maturities of long term debt                                                 1,118,750               100,000
                                                                                    --------------         -------------
       Total current liabilities                                                         7,537,029             6,393,652

Long term debt, net of current maturities                                                  100,000             1,118,750
                                                                                    --------------         -------------
         Total liabilities
                                                                                         7,637,029             7,512,402
                                                                                    --------------         -------------
Shareholders' equity
    Series A convertible preferred stock, $.0033 par value; $6,537,468
      liquidation preference; 1,000,000 shares authorized; 199,903 and 178,186
      shares issued and outstanding on March 31, 2007 and June 30,
      2006, respectively                                                                 2,418,644             2,092,885

    Series B convertible preferred stock, $.0033 par value; $6,583,789
      liquidation preference; 500,000 shares authorized; 201,886 and 192,921
      shares issued and outstanding on March 31, 2007 and June 30,
      2006                                                                               2,519,689             2,501,209

     Series C convertible preferred stock, $.0033 par value;
      $1,683,923 liquidation preference; 100,000 shares authorized; 12,962
      shares issued and outstanding on March 31, 2007 and June 30, 2006                    205,361               205,361

    Preferred stock, $.0033 par value; 400,000 shares authorized; no shares
      issued and outstanding on March 31, 2007 and June 30, 2006                                 -                     -

    Common stock, $.0033 par value; 65,000,000 authorized; 34,309, 713 and
      33,134,097 shares issued and outstanding on March 31, 2007 and June
      30, 2006, respectively                                                               112,564               109,344
     Additional paid-in capital                                                         79,674,624            79,570,125
     Accumulated deficit                                                              (83,720,339)          (81,267,164)
                                                                                    --------------         -------------

            Total shareholders' equity                                                   1,210,543             3,211,760
                                                                                    --------------         -------------

                                                                                     $   8,847,572         $  10,724,162
                                                                                    ==============         =============
</TABLE>
            See notes to condensed consolidated financial statements

                                       2
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                        For the three months ended                 For the nine months ended
                                                                March 31,                                  March 31,
                                                                ---------                                  ---------
                                                         2007                 2006                 2007                 2006
                                                 -------------------   -----------------   -------------------    ------------------
<S>                                              <C>                   <C>                 <C>                   <C>
Revenue
    Voice services                               $        2,069,653    $      3,391,546    $        6,846,114    $       10,761,628
    Managed service charges                               2,202,885           1,867,451             6,417,542             6,072,458
    Equipment and consulting                                  7,453              52,679                 8,605                73,723
                                                 -------------------   -----------------   -------------------    ------------------
                                                          4,279,991           5,311,676            13,272,261            16,907,809
                                                 -------------------   -----------------   -------------------    ------------------
Cost of revenue (excluding depreciation
        and amortization shown separately below)
    Voice services                                        1,501,798           2,497,298             4,655,070             7,301,754
    Managed service charges                               1,534,125           1,009,146             4,197,414             3,695,306
    Equipment and consulting                                      -                   -                     -                   175
                                                 -------------------   -----------------   -------------------    ------------------
                                                          3,035,923           3,506,444              8,852,484           10,997,235
                                                 -------------------   -----------------   -------------------    ------------------
Operating expenses

    General and administrative                              932,636           1,110,265             3,549,725             4,150,227
    Engineering and development                              39,511             107,119               132,549               439,918
    Sales and marketing                                     718,989             861,510             2,439,656             3,451,993
    Depreciation and amortization                           204,517             216,523               616,613               667,120
                                                 -------------------   -----------------   -------------------    ------------------
                                                          1,895,653           2,295,417             6,738,543             8,709,258
                                                 -------------------   -----------------   -------------------    ------------------

 Loss before other income (expense)                        (651,585)           (490,185)           (2,318,766)           (2,798,684)

 Other income (expense)
    Other income                                                  -                   -                     -               419,200
    Interest income (expense)                               (50,387)             34,006              (133,704)               54,360
                                                 -------------------   -----------------   -------------------    ------------------
                                                            (50,387)             34,006              (133,704)              473,560
                                                 -------------------   -----------------   -------------------    ------------------
Loss before income taxes                                   (701,972)           (456,179)           (2,452,470)           (2,325,124)

     Benefit from (Provision for) income taxes               66,659             (30,387)                 (705)              (35,817)
                                                 -------------------   -----------------   -------------------    ------------------
 Net loss                                        $         (635,313)   $       (486,566)   $       (2,453,175)    $      (2,360,941)
                                                 ===================   ================    ===================    ==================

            See notes to condensed consolidated financial statements

                                       3
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

(Continued)                                             For the three months ended                 For the nine months ended
                                                                March 31,                                  March 31,
                                                                ---------                                  ---------
                                                         2007                 2006                 2007                 2006
                                                 -------------------   -----------------   -------------------    ------------------
Net loss                                         $         (635,313)   $      (486,566)    $       (2,453,175)    $      (2,360,941)
                                                 ===================   ================    ===================    ==================


    Dividends on convertible preferred stock               (207,937)          (145,278)              (595,070)             (509,024)
                                                 -------------------   -----------------   -------------------    ------------------

Net loss attributable to common   shareholders   $         (843,250)   $      (631,844)    $       (3,048,245)    $      (2,869,965)
                                                 ===================   ================    ===================    ==================

Basic and diluted net loss per share             $            (0.02)   $         (0.02)    $            (0.09)    $           (0.09)
                                                 ===================   ================    ===================    ==================
    Weighted average common shares
       outstanding, basic and diluted                    34,116,380         31,774,479             33,586,814            30,587,875
                                                 ===================   ================    ===================    ==================
</TABLE>
            See notes to condensed consolidated financial statements

                                       4
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                     For the nine months ended
                                                                                              March 31,
                                                                                              ---------
                                                                                      2007                  2006
                                                                                ---------------       ---------------
  <S>                                                                            <C>                  <C>
  Cash flows from operating activities
       Net loss                                                                  $   (2,453,175)       $   (2,360,941)
       Adjustments to reconcile net loss to net cash used in operating
       activities
         Depreciation                                                                    51,493               101,998
         Amortization                                                                   565,120               565,120
          Bad debt expense                                                              395,649               264,872
         Non-cash charge to operations with respect to
                  Stock, options and warrants issued for services and
             amortization of previously issued warrants                                 357,292                87,652
         Other income
                                                                                              -              (424,166)
         Loss on disposal of property and equipment                                       3,323                 1,790

       Changes in operating assets and liabilities
         Restricted cash                                                                      -                25,958
         Accounts receivable                                                           (147,204)             (242,875)
         Inventories                                                                    (10,461)               62,349
         Prepaid expenses and other current assets                                     (112,699)              (74,518)
         Other assets                                                                   (47,030)              (12,517)
           Accounts payable and accrued expenses                                       (343,536)             (315,198)
         Deferred revenue                                                               562,828               (95,447)
                                                                                ---------------       ---------------
           Net cash used in operating activities                                     (1,178,400)           (2,415,923)
                                                                                ---------------       ---------------
  Cash flows from investing activities

         Payment on existing customer list                                             (100,000)             (100,000)
         Patent costs paid                                                               (8,901)               (7,385)
         Purchases of property and equipment
                                                                                              -               (31,492)
                                                                                ---------------       ---------------

           Net cash used in investing activities                                $      (108,901)         $   (138,877)
                                                                                ---------------       ---------------

            See notes to condensed consolidated financial statements

                                       5
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

(Continued)
                                                                                     For the nine months ended
                                                                                              March 31,
                                                                                              ---------
                                                                                      2007                  2006
                                                                                ---------------       ---------------
Cash flows from financing activities

     NASDAQ listing fees                                                                      -              (30,184)
     Proceeds from securities purchase agreement                                        100,000              425,000
     Cost associated with securities purchase agreement
                                                                                              -              (17,800)

     Advance from shareholder                                                                 -              210,000
                                                                                ---------------       ---------------

                Net cash provided by financing activities                               100,000              587,016
                                                                                ---------------       ---------------

Net decrease in cash and cash equivalents
                                                                                     (1,187,301)          (1,967,784)

Cash and cash equivalents, beginning of period
                                                                                      2,016,156            3,325,318
                                                                                ---------------       ---------------

Cash and cash equivalents, end of period                                        $       828,855       $    1,357,534
                                                                                ===============       ===============

Cash paid for income taxes                                                      $        68,071       $       35,817
                                                                                ===============       ===============

Cash paid for interest                                                          $       144,413       $        19,871
                                                                                ===============       ===============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Dividends accrued on convertible preferred stock                                $       595,070       $       509,024
                                                                                ===============       ===============

Dividends paid-in-kind on convertible preferred stock                           $       689,740       $       782,301
                                                                                ===============       ===============


Purchase price adjustment-reduction of long term debt and customer list         $             -               800,000
                                                                                ===============       ===============

Conversions of preferred stock to common stock                                  $       345,501       $       983,691
                                                                                ===============       ===============

Issuance of common stock for consulting services                                $             -       $        50,250
                                                                                ===============       ===============

Conversion of debt to common stock                                              $             -        $      210,000
                                                                                ===============       ===============
</TABLE>

           See notes to condensed consolidated financial statements

                                       6
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)




1.   Interim financial information

     The summary financial information  contained herein is unaudited;  however,
     in the opinion of management,  all adjustments  (consisting  only of normal
     recurring  accruals)  necessary for a fair  presentation  of such financial
     information have been included.  These financial statements,  including the
     condensed  consolidated  balance sheet as of June 30, 2006,  which has been
     derived from audited financial statements, are presented in accordance with
     the  requirements  of Form  10-QSB and  consequently  may not  include  all
     disclosures  normally required by generally accepted accounting  principles
     or those normally made in the Company's  Annual Report on Form 10-KSB.  The
     accompanying  condensed consolidated financial statements and related notes
     should be read in  conjunction  with the  Company's  Annual  Report on Form
     10-KSB for the fiscal year ended June 30, 2006.  The results of  operations
     for the nine months ended March 31, 2007 are not necessarily  indicative of
     the results to be expected for the full year.

2.   Management's Plan and Going Concern

     Historically,   the  Company  has  experienced  significant  recurring  net
     operating  losses as well as  negative  cash  flows  from  operations.  The
     Company's  main source of  liquidity  has been  equity and debt  financing,
     which has been used to fund  continuing  losses from operating  activities.
     Based on the Company's  cash  position of  approximately  $.8 million,  and
     further  taking into  account  ongoing  litigation  expenses as well as the
     current  maturity  dates of the  Company's  long  term  debt,  the  Company
     believes  that  they may not  have  sufficient  cash to meet the  Company's
     funding  needs  through  March 31,  2008.  The  Company's  ability to raise
     additional  capital  to fund  operations  also  has  been  impaired  by (a)
     existing  litigation  and (b) the  Company's  current  stock  price and the
     adverse  effect  of  the  issuance  of  low  priced  stock  caused  by  the
     anti-dilution  provisions of the Company's outstanding preferred stock. The
     Company will continue its cost reduction efforts as well as seek additional
     financing to restructure its current debt.  However,  based upon the issues
     discussed herein,  there can be no assurances that the Company will be able
     to raise  additional  capital,  reverse  its  operating  loss or cash  flow
     deficiency,  or  that  the  Company  will be able  to  satisfy  its  future
     obligations.  These  factors  raise  substantial  doubt about the Company's
     ability to continue as a going  concern.  The  financial  statements do not
     include any  adjustment  relating  to the  recoverability  of the  recorded
     assets or the  classification  of liabilities  that may be necessary should
     the Company be unable to continue as a going concern.

3.   The Company

     The  consolidated  financial  statements  include the accounts of NetWolves
     Corporation  and  its  subsidiaries,   NetWolves  Technologies  Corporation
     ("NWT"),  Norstan Network Services,  Inc., d/b/a NetWolves Network Services
     ("NNS")  and  TSG  Global   Education  Web,  Inc.   ("TSG")   (collectively
     "NetWolves" or the "Company").

     NetWolves   provides  network  security   solutions  coupled  with  network
     management   and   communication   services.   NetWolves'   products  offer
     applications  such  as  firewalls,   virtual  private  networks,  intrusion
     detection   systems,   content  filtering,   virus  detection,   congestion
     management,  and intelligent  failover.  Additionally,  NetWolves  provides
     network design, provisioning, monitoring, and management services.

                                       7
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


4.   Significant accounting policies

     Principles of consolidation

     The condensed  consolidated  financial  statements  include the accounts of
     NetWolves  Corporation and its subsidiaries.  All significant  intercompany
     transactions and balances have been eliminated in consolidation.

     Use of Estimates

     The  preparation of financial  statements,  in conformity  with  accounting
     principles  generally  accepted in the United  States of America,  requires
     management  to make  estimates  and  assumptions  that affect the  reported
     amounts of assets and liabilities  and disclosure of contingent  assets and
     liabilities  at the  date of the  financial  statements  and  the  reported
     amounts of  revenues  and  expenses  during the  reporting  period.  Actual
     results could differ from those estimates.

     Basic and diluted net loss per share

     The diluted loss per share does not include the impact of potential  shares
     to be issued upon  exercise of  convertible  preferred  stock,  options and
     warrants  aggregating  approximately 22.1 million and 22.0 million at March
     31,  2007  and  2006,  respectively,  because  the  Company  had a net loss
     attributable to common  shareholders  and,  therefore,  the effect would be
     antidilutive.

     Inventories

     Inventories  consist of raw materials and finished  goods.  Inventories are
     valued at the lower of cost or net  realizable  value  using the  first-in,
     first-out method. Additionally, raw material and finished goods amounted to
     $160,851  and $ 152,172,  respectively,  at March 31, 2007 and $203,100 and
     $99,462 respectively, at June 30, 2006.

     Reclassifications

     Certain  reclassifications  have  been made to the  condensed  consolidated
     financial  statements  shown  for the  prior  period  in order to have them
     conform to the current period's classifications.

     Stock-based compensation

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement of Financial  Accounting  Standard No. 123 (revised 2004),  Share
     Based Compensation ("SFAS No. 123(R)"). This Statement revised SFAS No. 123
     ("SFAS No. 123"),  "Accounting for Stock Based  Compensation." The revision
     establishes standards for the accounting of transactions in which an entity
     exchanges  its  equity  instruments  for  goods or  services,  particularly
     transactions  in which an entity obtains  employee  services in share-based
     payment  transactions.  The revised  statement  requires a public entity to
     measure the cost of employee  services received in exchange for an award of
     equity  instruments  based on the grant-date fair value of the award.  That
     cost is to be  recognized  over the period  during  which the  employee  is
     required  to provide  service in  exchange  for the award.  Changes in fair
     value  during  the  requisite  service  period  are  to  be  recognized  as
     compensation  cost over that  period.  In addition,  the revised  statement
     amends SFAS No. 95,  "Statement  of Cash Flows," to require that excess tax
     benefits be reported as a financing cash flow rather than as a reduction of
     taxes paid.

                                       8
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)




     Stock-based compensation (continued)

     After  evaluation,  on June  29,  2006,  the  Board of  Directors  approved
     accelerating the vesting of  approximately  263,104 stock options under the
     Company's  stock plans and granted 815,500 options to employees and 600,000
     options to the Board of Directors of the Company, which vested immediately.
     The options had a range of exercise  prices of $.15 to $12.00.  The closing
     price of the Company's  common stock on June 28, 2006, the last trading day
     before approval of  acceleration,  was $0.11.  Since all of the accelerated
     options were  out-of-the-money at the time of the acceleration no charge to
     operations  was recorded.  Generally,  all options  issued to employees are
     issued at the money and  accordingly  no charge to operations was recorded.
     The purpose of the  accelerated  vesting was to enable the Company to avoid
     recognizing future compensation  expense associated with these options upon
     adoption of SFAS No. 123R. The aggregate  pre-tax expense that,  absent the
     acceleration  and  immediate  vesting,  would  have been  reflected  in the
     Company's  consolidated  financial  statements  beginning in fiscal 2007 is
     estimated to be approximately $ 140,000.

     Effective  July 1, 2006,  the Company  adopted  the fair value  recognition
     provisions  of SFAS  No.  123R  using  the  modified-prospective-transition
     method.  As a result,  the  Company  recognized  stock  based  compensation
     expense for the three and nine months ended March 31, 2007 of approximately
     $10,000 and $220,000 respectively.  The stock based compensation expense is
     included  in  general   and   administrative   expense  in  the   condensed
     consolidated statement of operations.

     Prior to July 1, 2006,  the  Company's  stock-based  employee  compensation
     plans were accounted for under the recognition  and measurement  provisions
     of Accounting Principle Board Opinion ("APB") No. 25, "Accounting for Stock
     Issued  to  Employees"  ("APB  No.  25") and  related  Interpretations,  as
     permitted  by FASB  Statement  No.  123.  The  Company  did  not  recognize
     stock-based  compensation  cost in its statement of operations  for periods
     prior to July 1, 2006 as all options granted had an exercise price equal to
     or greater than the market value of the underlying common stock on the date
     of grant. However,  compensation expense was recognized for certain options
     granted to non-employees of the Company based upon fair value.

     As  was  permitted   under  SFAS  No.  148,   "Accounting  for  Stock-Based
     Compensation - Transition and Disclosure,"  which amended SFAS No. 123, the
     Company  elected  to  continue  to follow  the  intrinsic  value  method in
     accounting  for  its  stock-based  employee  compensation  arrangements  as
     defined  by  APB  No.  25,  and  related  interpretations   including  FASB
     Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
     Compensation,"  an  interpretation  of APB No. 25. No stock-based  employee
     compensation cost is reflected in operations,  as all options granted under
     those plans had an exercise price equal to or greater than the market value
     of the underlying  common stock on the date of grant.  The following  table
     illustrates the effect on net loss and net loss per share as if the Company
     had  applied  the fair  value  recognition  provisions  of SFAS No.  123 to
     stock-based employee compensation:


                                       9
<PAGE>
                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



         Stock-based compensation (continued)
<TABLE>
<CAPTION>
                                                           For the three months ended       For the nine months ended
                                                           --------------------------       -------------------------
                                                                 March 31, 2006                   March 31, 2006
                                                                 --------------                   --------------
        <S>                                                    <C>                                 <C>
        Net loss attributable to common shareholders,
          as reported                                          $    (631,844)                      $ (2,869,965)
        Deduct:  Total stock-based employee
          compensation expense determined under fair
          value based method for all awards, net of
          related tax effects                                        (96,423)                          (289,269)
                                                               -------------                        -----------
        Pro forma net loss attributable to common
        shareholders                                           $    (728,267)                        (3,159,234)
                                                               =============                        ===========
        Basic and diluted net loss per share

                 As reported                                   $       (0.02)                       $     (0.09)
                 Pro forma                                     $       (0.02)                       $     (0.10)
</TABLE>
        A summary of the Company's stock options is presented below:
<TABLE>
<CAPTION>
                                                                               Weighted-Average  Aggregate Intrinsic
                                                                 Stock Options  Exercise Price         Value
                                                       -------------------------------------------------------------
          <S>                                                     <C>            <C>                <C>
          Outstanding, June 30, 2006                              5,104,200      $    0.75
          Granted                                                 2,607,500      $    0.16
          Exercised                                                       -      $      -
          Cancelled/forfeited                                       (76,250)     $    1.84
                                                       -----------------------------------
          Outstanding, March 31, 2007                             7,635,450      $    0.54           $         -
                                                       =============================================================
          Exercisable, March 31, 2007                             7,033,591      $    0.57           $         -
                                                       =============================================================
</TABLE>
          The  following  table  summarizes   information  about  stock  options
          outstanding at March 31, 2007:
<TABLE>
<CAPTION>
                                                        Options                                  Options
                                                     outstanding at                           exercisable at
                                                     March 31, 2007                           March 31, 2007
                                                     --------------                           --------------
                                                          Weighted
                                                           average       Weighted                        Weighted
                                                          remaining      average                          average
               Range of                  Number of       contractual     exercise       Number of        exercise
            exercise prices               shares            life          price          Shares            price
            ---------------               ------            ----          -----          ------            -----
       <S>                                <C>                 <C>        <C>            <C>               <C>
       $      0.00-$  0.50                5,213,000           4.40       $   .15        4,611,141         $    .15
       $      0.51-$  1.00                1,010,700           3.11       $   .99        1,010,700         $   1.00
       $      1.01-$  1.50                1,302,750           1.00       $  1.19        1,302,750         $   1.19
       $      1.51-$  2.00                    6,500           1.56       $  1.88            6,500         $   1.88
       $      2.01-$ 12.00                  102,500           1.85       $  6.90          102,500         $   6.90
                                          ---------                                     ---------
                                          7,635,450                                     7,033,591
                                          =========                                     =========
</TABLE>
                                       10
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Stock-based compensation (continued)

During the nine months  ended March 31,  2007,  the  Company  granted  2,607,500
options  with a  weighted  average  exercise  price of $0.16 and a fair value of
$315,325.  During the nine months ended March 31, 2007 1,918,414  options with a
weighted average  exercise price of $0.16 vested.  At March 31, 2007, there were
601,859  non-vested  options  outstanding  with an exercise price of $0.16.  The
remaining   compensation   expense  related  to  these  non-vested   options  is
approximately  $70,000 and will be expensed  over a weighted  average  period of
1.71 years.

The weighted  average fair value of options granted during the nine months ended
March 31, 2007 is $0.11.

Summary of Recently Issued Accounting Pronouncements

In September  2005,  the FASB  ratified  the EITF's Issue No. 05-8,  "Income Tax
Consequences of Issuing  Convertible Debt with a Beneficial  Conversion Feature"
("EITF 05-8"),  which discusses  whether the issuance of convertible debt with a
beneficial  conversion  feature results in a basis  difference  arising from the
intrinsic  value of the beneficial  conversion  feature on the  commitment  date
(which is  recorded  in the  shareholders'  equity for book  purposes,  but as a
liability for income tax purposes) and, if so, whether that basis  difference is
a temporary  difference  under FASB  Statement No. 109,  "Accounting  for Income
Taxes." The statement  will be effective for  accounting  modifications  of debt
instrument  beginning in the first interim or annual  reporting period beginning
after  December  15,  2005.  The  adoption  of EITF 05-8 did not have a material
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.

In October 2005, the FASB issued FSP FAS 123(R)-2,  "Practical  Accommodation to
the  Application  Grant Date as Defined in FASB  Statement  No.  123(R)",  which
provides  clarification of the concept of mutual understanding  between employer
and employee with respect to the grant date of a share-based payment award. This
FSP provides that a mutual  understanding  of the key terms and conditions of an
award shall be presumed to exist on the date the award is approved by management
if the  recipient  does not have the  ability  to  negotiate  the key  terms and
conditions of the award and those key terms and conditions  will be communicated
to the individual recipient within a relatively short time period after the date
of approval.  This  guidance was  applicable  upon the initial  adoption of SFAS
123(R).  The  adoption  of this  pronouncement  did not  have an  impact  on the
Company's consolidated financial position, results of operations, or cash flows.

In November 2005, the FASB issued Staff Position No. FAS 123 (R)-3,  "Transition
Election  Related  to  Accounting  for the Tax  Effects of  Share-Based  Payment
Awards,"  FAS  123(R)  provides  that  companies  may  elect to use a  specified
alternative  method to  calculate  the  historical  pool of excess tax  benefits
available to absorb tax  deficiencies  recognized  upon adoption of SFAS No. 123
(R). The option to use the alternative method is available regardless of whether
SFAS  No.  123 (R) was  adopted  using  the  modified  prospective  or  modified
retrospective  application  transition method, and whether it has the ability to
calculate  its pool of excess tax  benefits in  accordance  with the guidance in
paragraph  81 of SFAS No. 123 (R).  This method only  applies to awards that are
fully vested and  outstanding  upon adoption of SFAS No. 123 (R). FAS 123 (R)- 3
became effective after November 10, 2005. The adoption of SFAS No. 123 (R)-3 did
not have a material impact on the Company's  consolidated  financial position or
results of operations.

                                       11
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)





Summary of Recently Issued Accounting Pronouncements (continued)


In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial Instruments" ("SFAS No. 155") an amendment to SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities".   This  statement  resolves  issues  addressed  in  Statement  133
Implementation  Issue  No.  D1,  "Application  of  Statement  133 to  Beneficial
Interests in Securitized  Financial Assets." This statement is effective for all
financial  instruments  acquired or issued after the  beginning of the Company's
first  fiscal  year that begins  after  September  15, 2006 with early  adoption
permitted.  The Company  does not expect the  adoption of SFAS No. 155 to have a
material impact on its consolidated financial statements.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial  Assets"  - ("SFAS  No.  156") an  amendment  of SFAS  No.  140.  This
Statement requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable.  This statement
should be adopted as of the beginning of its first fiscal year that begins after
September 15, 2006 with early  adoption  permitted.  The Company does not expect
the  adoption  of SFAS No.  156 to have a  material  impact on its  consolidated
financial statements.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
clarifies  the  accounting  for  uncertainty  in income taxes  recognized  in an
enterprise's  financial  statements  in  accordance  with  SFAS  No.  109.  This
Interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition,  classification, interest and penalties, accounting in interim
periods,  disclosure,  and  transition.  FIN 48 is  effective  for fiscal  years
beginning  after  December 15, 2006. The Company does not expect the adoption of
FIN 48 to have a material impact on its consolidated financial statements.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market  participants would use when pricing an asset or
liability  and  establishes  a  fair  value   hierarchy  that   prioritizes  the
information used to develop those assumptions.  SFAS No. 157 requires fair value
measurements  to  be  separately  disclosed  by  level  within  the  fair  value
hierarchy.  SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.  The Company is currently  evaluating the impact of adopting SFAS No. 157
on its future results of operations and financial condition.

In  September  2006,  the  Securities  and  Exchange   Commission  issued  Staff
Accounting  Bulletin  ("SAB")  No. 108,  "Considering  the Effects of Prior Year
Misstatements   When   Quantifying   Misstatements  in  Current  Year  Financial
Statements".  SAB No. 108 provides interpretive guidance on the consideration of
the  effects  of  prior  year   misstatements   in   quantifying   current  year
misstatements for the purpose of assessing materiality. SAB No. 108 is effective
for fiscal  years  ending  after  November  15,  2006.  The Company is currently
evaluating  the  impact  of  adopting  SAB  No.  108 on its  future  results  of
operations and financial condition.

                                       12
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



Summary of Recently Issued Accounting Pronouncements (continued)


In  February  2007,  the FASB issued  SFAS No.  159,  The Fair Value  Option for
Financial  Assets and  Financial  Liabilities--Including  an  amendment  of FASB
Statement No. 115.  This  Statement  permits  entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve  financial  reporting  by providing  entities  with the  opportunity  to
mitigate  volatility in reported earnings caused by measuring related assets and
liabilities  differently  without  having  to  apply  complex  hedge  accounting
provisions.  The fair value option  established  by this  Statement  permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report  unrealized  gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business  entity does not report  earnings) at each  subsequent
reporting date. A not-for-profit  organization shall report unrealized gains and
losses in its  statement of  activities  or similar  statement.  This  statement
applies to all entities,  including  not-for-profit  organizations.  Most of the
provisions  of this  Statement  apply only to entities that elect the fair value
option. However, the amendment to FASB Statement No. 115, Accounting for Certain
Investments  in  Debt  and  Equity  Securities,  applies  to all  entities  with
available-for-sale  and trading securities.  Some requirements apply differently
to entities that do not report net income. This Statement is effective as of the
beginning of an entity's  first fiscal year that begins after November 15, 2007.
The  Company  does not  expect the  adoption  of SFAS No. 159 to have a material
impact on its consolidated financial statements.

In June 2006,  the EITF reached a consensus on Issue No. 06-3 ("EITF  06-3"),  "
Disclosure  Requirements  for Taxes  Assessed  by a  Governmental  Authority  on
Revenue-Producing  Transactions."  The  consensus  allows  companies  to  choose
between two  acceptable  alternatives  based on their  accounting  policies  for
transactions  in which the company  collects  taxes on behalf of a  governmental
authority,  such as sales taxes.  Under the gross  method,  taxes  collected are
accounted  for as a  component  of sales  revenue  with an  offsetting  expense.
Conversely,  the net method allows a reduction to sales  revenue.  If such taxes
are reported gross and are significant,  companies should disclose the amount of
those  taxes.  The  guidance  should be applied  to  financial  reports  through
retrospective application for all periods presented, if amounts are significant,
for interim and annual  reporting  beginning  after December 15, 2006 with early
adoption is permitted.  The adoption of EITF 06-3 did not have a material effect
on our consolidated financial statements.

In December  2006,  the FASB issued FASB Staff  Position  ("FSP")  EITF  00-19-2
"Accounting for Registration  Payment  Arrangements"  ("FSP EITF 00-19-2") which
specifies  that the contingent  obligation to make future  payments or otherwise
transfer  consideration  under a  registration  payment  arrangement  should  be
separately  recognized and measured in accordance  with SFAS No. 5,  "Accounting
for  Contingencies."  Adoption of FSP EITF 00-19-02 is required for fiscal years
beginning  after  December 15,  2006.  We do not expect the adoption of FSP EITF
00-19-2  to have a  material  impact  on our  consolidated  financial  position,
results of operations or cash flows.

                                       13
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



5.   Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                              March 31,             June 30,
                                                                                 2007                  2006
                                                                          -----------------        -------------
              <S>                                                             <C>                  <C>
              Trade accounts payable and other accrued operating

                 expenses                                                     $   2,768,714        $   3,271,042
              Sales and excise taxes payable                                         86,167              132,409
              Universal services charges payable                                  1,479,747            1,114,795
              Dividends payable                                                     396,149              490,819
              Compensated absences                                                   92,536              356,361
              Other current liabilities                                             482,889              372,826
              Bonuses and commissions payable                                        10,833               16,974
              Accrued taxes                                                             149                  159
                                                                              -------------        -------------
                                                                              $   5,317,184        $   5,755,385
                                                                              =============        =============

</TABLE>
6.   Long Term Debt

Long term debt at March 31, 2007 consists of the following:
<TABLE>
<CAPTION>
                                                                              March 31,           June 30,
                                                                                2007                2006
                                                                            --------------       -----------
           <S>                                                               <C>                 <C>
           Note payable - 13 month note, 18% annual interest rate,
           paid monthly. In addition, the Company is required to
           maintain certain covenants. This note was due March 2007
           but has been extended to January 1,  2008. Collateralized
           by substantially all assets of the Company.                       $    403,750        $    403,750
           Note payable - 18 month note, 18% annual interest rate
           paid monthly. In addition, the Company is required to
           maintain certain covenants. This note was due November
           2007, with the exception of $95,000, has been extended to
           January 1, 2008. Collateralized by substantially all
           assets of the Company.                                                 665,000             665,000
           Note payable - 1 remaining contingent payment in the
           amount of $50,000 due July 31, 2007. Payments contingent
           on achieving targeted revenues
           (See Note 7).                                                           50,000             150,000
           Note Payable - 18-month note, 10% annual interest rate
           paid monthly. In addition, the Company is required to
           maintain certain covenants. Collateralized by substantially                                      -
           all assets of the Company.                                             100,000
                                                                            --------------       ------------

           Total Long-Term Debt                                                 1,218,750           1,218,750

           Less: Current Maturities                                            (1,118,750)           (100,000)
                                                                            --------------       ------------
           Long-Term Debt, Less Current Maturities                           $    100,000        $  1,118,750
                                                                            ==============       =============
</TABLE>
                                       14
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Maturities  of  long-term  debt at March 31, 2007 for the next five years and in
the aggregate are as follows:
<TABLE>
<CAPTION>
                             For the period ending
                             ---------------------
                                  December 31,                Amount
                                  ------------                ------
                                      <S>                 <C>
                                      2007                $  1,118,750
                                      2008                     100,000
                                                          -------------
                                                          $  1,218,750
                                                          =============
</TABLE>
At all times the Company must maintain  current  accounts  receivable of no less
than $1,500,000.Current accounts receivable is defined as amounts which are less
than sixty days past due.

7.   Acquisition of customer list

On  October 1,  2004,  the  Company  acquired  a  customer  list from  Education
Communications   Consortia,   Inc.  ("ECCI")  for  a  total  purchase  price  of
$1,444,277,  including $144,277 in acquisition costs, of which $500,000 was paid
in cash on the date of closing.  The remaining $800,000 was originally  recorded
as a note  payable  due in  four  annual  installments  of  $200,000  commencing
November 30, 2005,  bearing interest of 4% per annum. The payment of each of the
four annual  installments  is contingent  upon  achieving  annual  revenue of $2
million for each twelve  month period  ending  September  30, 2005 to 2008.  The
purchase  price,  including  the entire  contingent  liability,  was  originally
recorded as an intangible  asset, as it was initially  believed that payment was
assured beyond a reasonable  doubt,  and was amortized over its expected  useful
life of 5 years.

In September 2005, the Company  determined that gross revenues  derived from the
ECCI customer list did not reach the annual revenue of $2 million as required by
the  purchase  agreement  and also no longer  believes  that the  balance of the
payments are assured  beyond a reasonable  doubt.  Accordingly,  the Company has
recorded  a  decrease  in the  customer  list in the  amount of  $800,000  and a
corresponding  decrease in notes payable.  As a result, the Company has reversed
previously recorded amortization expense and accrued interest totaling $144,002,
which is reflected as other income in the  accompanying  condensed  consolidated
statements of operations.  The adjustment  will also have the effect of reducing
future amortization expense by $160,000 per annum.

In September 2006, the Company  determined that gross revenues  derived from the
ECCI customer list did not reach the annual revenue of $2 million as required by
the purchase agreement and no longer believes that the remaining $400,000 of the
performance payment is assured beyond a reasonable doubt.

In  April  2005,  the  Company  acquired  a  customer  list and  entered  into a
non-compete agreement for $200,000 and $200,000 respectively.  The customer list
has an estimated useful of 5 years and the non-compete will be amortized over 27
months.  The Company made cash payment of $150,000 with three additional  annual
payments  commencing  July 31, 2005 in the  amounts of  $100,000,  $100,000  and
$50,000 (see Note 6).

                                       15
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


8.   Related party transactions

During  the three  months  ended  March  31,  2007 and 2006,  the  Company  paid
approximately $69,000 and $33,000, respectively, for legal services to law firms
in which an employee/stockholder is affiliated.

During December 2006, at a meeting of the  compensation  committee,  the Company
authorized  the  issuance of 700,000  shares of common  stock under its existing
stock option/stock issuance plans to related parties.

During  the nine  months  ended  March  31,  2007 and  2006,  the  Company  paid
approximately  $157,000 and  $96,000,  respectively,  for legal  services to law
firms in which an employee/stockholder is affiliated.

The Company  received a non-interest  bearing  advance from a shareholder in the
amount of  $210,000  during  the  quarter  ended  September  30,  2005,  with no
scheduled repayment terms. During the quarter ended December 31, 2005 this short
term debt was repaid with the issuances of 840,000  shares of restricted  common
stock, with no registration rights.

9.   Shareholders' equity

Preferred stock
---------------

On July 1, 2006 stock  dividends  totaling  21,720  shares were paid in Series A
Preferred  Stock to Series A  Preferred  Stock  investors  representing  accrued
dividends through June 30, 2006

On  February  1, 2007 stock  dividends  totaling  22,743  shares with a value of
$689,740  were  paid  in  Series  B  Preferred   Stock  to  Series  B  investors
representing accrued dividends through January 31, 2007.

For the nine months ended March 31, 2007, investors converted 3 shares of Series
A Preferred  Stock and 13,778  shares of Series B Preferred  Stock  resulting in
issuances of 275,616 shares of common stock with a value of $345,501. There were
no conversions of Series C Preferred Stock.

Dividends on the Series A, B and C Preferred  Stock accrue at a rate of 12%, 12%
and 9% per annum,  respectively.  Aggregate  dividends accrued for the three and
nine months ended March 31, 2007 were $207,937 and $595,070, respectively.

Options
-------

During  September 2006, the Company entered into an agreement with a consultant.
In return for services,  the Company  granted  options to purchase 50,000 shares
with a value of $5,000.

During  December 2006, the Company  entered into an agreement with a consultant.
In return for services,  the Company granted options to purchase  250,000 shares
with a value of $20,000.

During December 2006, at a meeting of the  compensation  committee,  the Company
authorized  the issuance of 2,307,500  options with a fair value of $290,325 and
700,000  shares of common stock under its existing stock  option/stock  issuance
plans.  This  represents an aggregate of 1,825,000  options with a fair value of
$237,250  issued to its executives and directors and 482,500 options with a fair
value of $53,075  issued to its employees and  consultants.  The options have an
exercise  price of $.16 and a vesting  period that ranges  from  immediately  to
twenty four months.  The closing price of the Company's common stock on December
12, the last trading day before authorization of the issuance was $0.16.

For the nine months ended March 31, 2007, the fair value of the Company's  stock
options was estimated on the following  assumptions:  (1) expected volatility of

                                       16
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

109% to 113%, (2) risk-free interest rates of 4.54% to 4.82% and (3) expected or
contractual  lives of 2 to 5 years.  The weighted  average grant date fair value
for stock options granted for the nine months ended March 31, 2007 was $.12.

10.  Securities purchase agreement

During March 2006,  the Company  entered into a  securities  purchase  agreement
whereas the Company sold 18% senior  secured  promissory  notes in the principal
amount of up to $950,000  and up to  1,000,000  shares of the  Company's  common
stock,  $ 0.0033 par value per share at a price of $0.05 per share or 100 shares
for each $95.00 of principal amount of notes sold. On March 21, 2006 the Company
issued  $403,750  principal  amount  of senior  secured  notes.  The notes  bear
interest at the rate of 18% and provide for a maturity date thirteen months from
the  closing  date.  The notes also  contain  subjective  acceleration  clauses.
Management  believes that the likelihood of acceleration is remote.  As a result
of this debt  financing  agreement  the  Company  issued  425,000  shares of the
Company's common stock for $21,250 with  registration  rights during the quarter
ended March 31, 2006.

In May  2006,  the  Company  entered  into  an  additional  securities  purchase
agreement  wherein the Company sold 18% senior secured  promissory  notes in the
principal amount of $665,000 and 700,000 shares of the Company's common stock at
a price of $0.05 per share or 100 shares for each $95.00 of principal  amount of
notes  sold.  The  notes  bear  interest  at the rate of 18% and  provide  for a
maturity  date  eighteen  months from the closing date. As a result of this debt
financing  agreement the Company issued  700,000 shares of the Company's  common
stock for $35,000 with registration rights.

During March 2007,  the Company  entered into a  securities  purchase  agreement
whereas  the  Company  sold 10%  secured  subordinated  promissory  notes in the
principal  amount of up to $712,500 and up to 1,500,000  shares of the Company's
common stock, $ 0.0033 par value per share at a price of $0.025 per share or 200
shares  for each  $95.00 of  principal  amount  of notes  sold.  The notes  bear
interest at the rate of 10% and provide for a maturity date eighteen months from
the  closing  date.  The notes also  contain  subjective  acceleration  clauses.
Management  believes that the likelihood of acceleration  is remote.  During the
quarter  ended  March 31, 2007 the  Company  sold one 10%  secured  subordinated
promissory  note in the amount of  $100,000.  As a result,  the  Company  issued
200,000 shares of the Company's common stock for $5,000 with registration rights
during the quarter ended March 31, 2007.

11.  Segment Information

The Company reports segments in accordance with SFAS No. 131 "Disclosures  about
Segments of an Enterprise and Related  Information"  ("SFAS 131"). The Company's
management evaluates its operations in three reportable business segments: Voice
Services,  Managed  Service  Charges and Equipment and  Consulting.  These three
segments reflect management's approach to operating and directing the businesses
and aligns financial and managerial reporting.

The Voice  Services  segment  provides  voice  services  including  switched and
dedicated  outbound,  switched and  dedicated  toll-free  inbound,  dedicated T1
access  loops,  calling and debit cards,  and  conference  calling.  The Managed
Service Charges segment, which operates worldwide, provides network and security
technology and a variety of recurring  managed data services.  The Equipment and
Consulting  segment,  which  operates  worldwide,  is  primarily  engaged in the
design,  development,  marketing and support of  information  delivery  hardware
products and software as well as providing  consulting  services on an as needed
basis for certain existing or potential customers.

                                       17
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                 For the three months ended            For the nine months ended
                                                         March 31,                             March 31,
                                                         ---------                             ---------
                                                    2007             2006                 2007             2006
                                            -----------------  -----------------   -----------------  ---------------
                  <S>                            <C>            <C>                      <C>           <C>
                                   Revenue
                            Voice Services       $  2,069,653   $      3,391,546       $  6,846,114    $    10,761,628
                   Managed Service Charges          2,202,885          1,867,451          6,417,542          6,072,458
                  Equipment and Consulting              7,453             52,679              8,605             73,723
                                            -----------------  -----------------   -----------------  ----------------
                                     Total          4,279,991          5,311,676         13,272,261         16,907,809
                                            =================  =================   =================  ================

                           Cost of revenue
                            Voice Services          1,501,798          2,497,298          4,655,070          7,301,754
                   Managed Service Charges          1,534,125          1,009,146          4,197,414          3,695,306
                  Equipment and Consulting                  -                  -                  -                175
                                            -----------------  -----------------   -----------------  ----------------
                                     Total          3,035,923          3,506,444          8,852,484         10,997,235
                                            =================  =================   =================  ================

                            Operating loss
                            Voice Services           (315,083)          (313,718)        (1,196,069)        (1,791,158)
                   Managed Service Charges           (335,367)          (176,467)        (1,121,194)        (1,007,526)

                  Equipment and Consulting             (1,135)                 -             (1,503)                 -
                                            -----------------  -----------------   -----------------  -----------------
                                     Total   $       (651,585)   $      (490,185)    $   (2,318,766)    $   (2,798,684)
                                            =================  =================   =================  ================
</TABLE>
Segment Information (continued)

Revenue  and  cost of  revenue  are  allocated  to each  segment  on a  specific
identification method, operating expenses are allocated to each segment on a pro
rata basis,  based upon revenue.  The Company is not disclosing total assets for
each reportable  segment  because this  information is not reviewed by the chief
operating decision maker.

All of the Company's sales occur in the United States and are shipped  primarily
from the Company's facilities in the United States.

Major Customer/Significant Agreements

For the three and nine months  ended March 31, 2007 and 2006 the Company did not
have  any  major  customer  that  accounted  for more  than 10% of  consolidated
revenue.

                                       18
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



Sprint Communications Company L.P.
The  Company  has  two  agreements  with  Sprint  Communications   Company  L.P.
("Sprint") to supply  telecommunication  services to the Company.  The agreement
for switched services has a term of 28 months and the agreement for the data and
private  line  services  has a term of 24 months.  The Company  currently  has a
commitment  to purchase a minimum of  telecommunication  services  monthly  from
Sprint, which expires November 2008. The remaining minimum monthly commitment is
as follows:

                                                    Monthly
         Months                                   Commitment
         ------                                   ----------
         53 - 64 (November 2007)                   650,000
         65 - 76 (November 2008)                   750,000

The Company made purchases from Sprint that aggregated approximately 32% and 44%
of the total cost of revenue for the nine months ended March 31,  2007and  2006,
respectively.  For the three  months  ended  March 31, 2007 and 2006 the Company
made  purchases  from Sprint that  aggregated  approximately  28% and 35% of the
total cost of revenue, respectively.

In addition,  the Company made purchases from MCI that aggregated  approximately
24% and 28% and Qwest that aggregated approximately 13% and 7% of the total cost
of revenue for the nine months ended March 31, 2007 and 2006, respectively.  For
the three months ended March 31, 2007 and 2006,  the Company made purchases from
MCI  that  aggregated  approximately  20%  and  34% and  Qwest  that  aggregated
approximately 13% and 8% of the total cost of revenue.

12.  Commitments and contingencies

Employment agreements

The Company has  employment  agreements  with certain  members of its  executive
management team. All of the employment  agreements  provide for certain payments
following death or disability, for certain fringe benefits such as reimbursement
for reasonable  expenses and participation in medical plans, and for accelerated
payments in the event of change of control of the Company.  The  specific  terms
are as follows:

As discussed  below,  the agreement with the Chief  Executive  Officer was for a
term of five  years at an annual  salary of  $275,000  subject to cost of living
increments.  On July 1, 2004, a new agreement was entered into for a term of six
years,  terminating on July 1, 2010, at an annual salary of $275,000  subject to
cost of living increments. As further discussed below, at a meeting of the Board
of Directors held on December 4, 2006, the Company  accepted the  resignation of
Walter M. Groteke as  Chairman,  Chief  Executive  Officer and a director of the
Company,  effective  immediately.  As previously  reported, a committee has been
appointed to search for candidates for the position of Chief Executive  Officer.
Until then  Michael R.  Rocque,  a director of the Company was  appointed as its
Acting Chief Executive Officer.

o    The agreement with the Senior Vice President was for a term of three years,
     subject  to two  additional  one-year  extensions,  at an annual  salary of
     $175,000.  On July 1, 2004, a new  agreement was entered into for a term of
     five years,  terminating on July 1, 2009 and subject to additional one-year
     extensions at an annual salary of $175,000. Effective April 1, 2007, Walter
     R.  Groteke  resigned as an officer,  director and employee of the Company.
     Mr.  Groteke  will  continue to act as a  consultant  to the  Company.  Mr.
     Groteke  shall be paid at the annual rate of $75,000  through  December 31,
     2007 at which time the agreement will terminate.

o    The  agreement  with the  Chief  Financial  Officer  is for a term of three
     years, subject to two additional one-year  extensions,  at an annual salary
     of $150,000.  On July 1, 2004, a new  agreement was entered into for a term
     of five  years,  terminating  on July 1,  2009 and  subject  to  additional
     one-year extensions, at an annual salary of $175,000.

                                       19
<PAGE>

                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

o    As part of the plan to reduce  certain  expenses  of the  Company the Chief
     Financial  Officer  voluntarily  accepted  a pay  reduction  of  50% of his
     current pay.  This amount is net of an existing 15% deferment and commenced
     February 1, 2007.  This  reduction  will only be reinstated to its original
     amount by the consent of the Company's Board of Directors.

Litigation

     a)   On April 24, 2006, the Company's  subsidiary  NetWolves ECCI Corp (the
          "Subsidiary")   filed  an  action  in  the  Florida   Circuit   Court,
          Hillsborough  County against Education  Communications  Consortia Inc.
          ("ECCI").  The action arises from ECCI's breach of the October 1, 2004
          Asset  Purchase  Agreement  between the parties (the  "Agreement")  by
          failing to pay  $70,273  pursuant  to a  reconciliation  of  billings,
          receivable and costs in accordance with the terms of the Agreement.

          On April 27,  2006,  ECCI served the Company  and  Subsidiary  with an
          action  in  the  Circuit  Court  of  Kanawha  County,  West  Virginia,
          alleging,  inter  alia  that  the  Subsidiary  had  failed  to pay the
          $200,000 first  installment of a promissory  note ("the Note") and has
          anticipatorily  breached  payment  of  the  remaining  balance.  As  a
          consequence, ECCI alleges that the entire $800,000 note, together with
          interest  and costs,  is joint and  severally  due and  payable by the
          Subsidiary and by the Company,  as guarantor.  ECCI asserts additional
          claims  against  the  Company in the  aggregate  sum of  approximately
          $121,000 based on alleged reimbursable costs incurred by ECCI.

          The Company and Subsidiary believe that ECCI's action is without merit
          and therefore no accrual has been made. Among other things,  it is the
          Company's   position  that  the  Agreement  provided  as  a  condition
          precedent to any  installment  payment that ECCI achieve  annual gross
          revenue of at least  $2,000,000;  and that ECCI failed to achieve this
          amount.  However,  there can be no assurances that the Company will be
          successful.

     b)   At a meeting of the Board of Directors  held on December 4, 2006,  the
          Company  accepted  the  resignation  of Walter M. Groteke as Chairman,
          Chief  Executive  Officer  and a director  of the  Company,  effective
          immediately.  At the same time,  Michael R. Rocque,  a director of the
          Company, was appointed as its Acting Chief Executive Officer.

          The  action  was the  result of a series of events  commencing  with a
          resolution  approved by the Board of  Directors on October 27, 2006 to
          separate the positions of Chairman and Chief Executive  Officer,  both
          positions  being  held by  Walter M.  Groteke,  subject  to  finding a
          suitable  candidate,  if any,  for the  position  of  Chief  Executive
          Officer. As previously  reported,  a committee was appointed to search
          for candidates  for the position of Chief  Executive  Officer.  At the
          same time Scott E. Foote,  formerly Vice  President,  was appointed as
          the   Company's   Acting   President  to  be  involved  in  day-to-day
          operations.

          In response to these  resolutions,  Mr.  Groteke  through his counsel,
          informed  the  Company on  November  16,  2006,  by written  notice as
          required by his employment  agreement,  that Mr. Groteke was resigning
          from the  Company  for "good  reason,"  as defined  in the  employment
          agreement;  that the  letter  constituted  his 15-day  formal  notice,
          making  his  resignation  effective  December  1,  2006;  and that Mr.
          Groteke was demanding all  compensation  and benefits set forth in the
          agreement through June 30, 2010, the remainder of its term.

          On November 21, 2006, the Company through its counsel responded to the
          November 16th letter by denying that Mr. Groteke had any basis for his
          claims, stating among other things, that Mr. Groteke remained Chairman
          and CEO with all of his responsibilities  inherent in these positions.
          By letter dated November 28, 2006, Mr. Groteke's  counsel affirmed his
          prior position.

                                       20
<PAGE>


                     NETWOLVES CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

          At the  December  4, 2006  Board of  Directors  meeting,  the Board of
          Directors formally accepted his resignation.  The acceptance was based
          on his voluntary  resignation and not for the reasons set forth by his
          counsel.

          On December 6, 2006, in the  Hillsborough  County Circuit Court of the
          State of  Florida,  Mr.  Groteke  served  the  Company  with an action
          seeking  declaratory  relief and a judgment for his full  compensation
          and benefits under the employment agreement, on the grounds previously
          set forth.

          It is the Company's position that Mr. Groteke voluntarily resigned and
          is no  longer  entitled  to  the  compensation  set  forth  under  his
          employment agreement

                                       21
<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


          Forward-Looking Statements

          This Form 10-QSB  includes,  without  limitation,  certain  statements
          containing   the   words   "believes."   "anticipates",   "estimates",
          "expects", and words of a similar nature, constitute  "forward-looking
          statements"  within the meaning of the Private  Securities  Litigation
          Reform  Act  of  1995.   This  Act   provides  a  "safe   harbor"  for
          forward-looking   statements   to   encourage   companies  to  provide
          prospective  information  about  themselves  so long as they  identify
          these statements as forward looking and provide meaningful, cautionary
          statements  identifying  important  factors  that could  cause  actual
          results to differ from the projected  results.  All  statements  other
          than  statements  of  historical  fact  made in this Form  10-QSB  are
          forward-looking.   In  particular,  the  statements  herein  regarding
          industry  prospects  and future  results of  operations  or  financial
          position are forward-looking  statements.  Forward-looking  statements
          reflect   management's   current   expectations   and  are  inherently
          uncertain.  The Company's actual results may differ significantly from
          management's  expectations  based on certain risks and  uncertainties,
          including the risk factors  referenced  in the Company's  filings with
          the Securities and Exchange  Commission.  Readers are cautioned not to
          place undue reliance on these forward-looking  statements. The Company
          does not undertake any obligation to release publicly any revisions to
          these   forward-looking   statements  to  reflect   future  events  or
          circumstances or to reflect the occurrence of unanticipated events.

          Overview
          NetWolves  Corporation  ("NetWolves"  or  the  "Company")  is  network
          continuity and security provider that offers high-performance  network
          security   solutions  coupled  with  robust  network   management  and
          communication services. The Company designs,  develops,  assembles and
          sells Internet infrastructure security platforms, coupled with network
          based  management  services,  designed  to  significantly  reduce  the
          up-front and ongoing costs  associated  with small,  medium and remote
          offices'  global  Internet  access.  NetWolves'  patent pending system
          technology  enables  organizations  to obtain their short,  middle and
          long term IT and e-business  initiatives through the deployment of our
          plug `n' play perimeter  office  security  platform,  coupled with our
          secure  remote   monitoring   and   management   ("SRM2  TM")  system.
          Additionally,   NetWolves'  advanced,  centralized,  reporting  module
          offers the ability for corporate executives to view, via the Internet,
          both  statistical  and  performance  based  metrics  for their  global
          network.

          We  operate  in three  segments.  The Voice  Services  segment,  which
          operates  worldwide,  provides voice services  including  switched and
          dedicated   outbound,   switched  and  dedicated   toll-free  inbound,
          dedicated T1 access  loops,  calling and debit cards,  and  conference
          calling.  The Managed  Services  Charges  ("MSC" or Managed  Services)
          segment  provides  network and  security  technology  and a variety of
          recurring managed data services.  The Equipment and Consulting segment
          delivers  networking  and security  equipment  and software as well as
          provides consulting services on an as needs basis for certain existing
          or potential customers.

          We have created an offering of managed products and services that meet
          the necessary  requirements  for  organizations  to move off expensive
          private data networks while  attaining the benefits and flexibility of
          public data network. Additionally, our proprietary technology provides
          a  high  level  of  security   through  its  integrated   approach  to
          management,  monitoring  and  interoperability  for small  and  medium
          remote  enterprise  locations  (locations  with less than 500  network
          users).  We sell a  Managed  Services  Offering  (MSO)  that  provides
          complete  system  solutions to  organizations  needing  cost-effective
          network  security  features  (firewall,  virtual  private  networking,
          routing,   intrusion  detection,   content  filtering,   email,  etc.)
          delivered on low-cost commodity hardware with Internet-based expansion
          capabilities.  Our system technology enables  organizations to achieve
          corporate  Information  technology  (IT)  and  e-business  initiatives
          through the deployment of easily installable perimeter office security
          platforms,  coupled  with  our  SRM(2)  TM  system.  SRM2 TM  provides
          centralized  management  capabilities  for  hundreds or  thousands  of
          remote locations without risking networking  integrity because it does
          not  require an  administrative  port on the remote  device,  which is
          common  network   vulnerability.   We  also  provide   cost-effective,
          value-added expansion technologies such as Intelligent Failover, which
          means that if one circuit for gaining access to information fails, the
          system would automatically switch to an alternative circuit based upon
          customer defined parameters.

                                       22
<PAGE>
          Critical accounting policies

          The Company's  discussion and analysis of its financial  condition and
          results  of  operations  is  based  upon  the  consolidated  financial
          statements, which have been prepared in accordance with U.S. generally
          accepted   accounting   principles.   The   preparation  of  financial
          statements  in  conformity  with U.S.  generally  accepted  accounting
          principles  requires management to make estimates and assumptions that
          affect the reported amounts of assets and liabilities,  the disclosure
          of contingent  assets and  liabilities as of the date of the financial
          statements,  and the reported  amounts of revenue and expenses  during
          the periods.  Estimates have been made by management in several areas,
          including,  but not limited to,  revenue  recognition,  allowance  for
          doubtful  accounts,  the  realizability of deferred tax assets,  stock
          based  compensation and goodwill and other intangible  assets. We base
          our   estimates  on  historical   experience   and  on  various  other
          assumptions that we believe to be reasonable under the  circumstances.
          Actual  results  may  differ  materially  from these  estimates  under
          different assumptions or conditions.

          We believe the following critical  accounting policies affect our more
          significant  judgments and estimates  used in the  preparation  of our
          consolidated financial statements.

          Revenue recognition

          We record  revenue in  accordance  with  Statement  of  Position  97-2
          "Software Revenue  Recognition"  ("SOP 97-2"),  issued by the American
          Institute of Certified Public Accountants (as modified by Statement of
          Position  98-9)  and  SEC  Staff  Accounting   Bulletin  104  "Revenue
          Recognition"  ("SAB 104") regarding  revenue  recognition in financial
          statements.  SOP 97-2  provides  additional  guidance  with respect to
          multiple  element  arrangements;   returns,  exchanges,  and  platform
          transfer  rights,  resellers,  services,  funded software  development
          arrangements, and contract accounting.

          Revenues generated from the resale of voice services are recognized as
          services are provided and are included  within Voice Services  revenue
          in the accompanying condensed consolidated statements of operations.

          Revenues  generated from the sale of recurring services within the MSC
          segment  are  recognized  as services  are  provided.  Maintenance  or
          monitoring  revenue  that is bundled  with an initial  licenses fee is
          deferred and recognized  ratably within the period in the accompanying
          consolidated statement of operations.

          Revenue  from  the  sale  of  hardware,  where  our  software  is  not
          essential,  is recognized  within Equipment and Consulting  revenue at
          the time of delivery of hardware  products to the  customer,  when the
          fee is  fixed  and  determinable,  collectibility  is  probable  and a
          contract  signed by both  parties has been  obtained.  Maintenance  or
          monitoring  revenue  that is bundled  with an initial  license  fee is
          deferred  and   recognized   ratably   within  MSC  revenue  over  the
          maintenance  or  monitoring  period  in  the  accompanying   condensed
          consolidated   statements   of   operations.   Amounts   deferred  for
          maintenance  or  monitoring  are based on the fair value of equivalent
          maintenance   or  monitoring   services  sold   separately.   We  have
          established   vendor  specific  objective  evidence  ("VSOE")  on  all
          undelivered elements of our software  arrangements,  which consists of
          maintenance, monitoring and, at times, training and consulting. We use
          the residual method for delivered  elements.  Our consulting  projects
          are  short-term in nature and are recorded as revenue in Equipment and
          consulting  revenues  in  the  accompanying   condensed   consolidated
          statements of operations when services are provided.

          Revenue for shipping and handling are included  within  Equipment  and
          consulting  revenue  and the  related  costs are  included  in cost of
          revenue  in the  accompanying  condensed  consolidated  statements  of
          operations.

          Allowance for doubtful accounts

          The Company  provides  allowances for doubtful  accounts for estimated
          losses from the  inability of customers to satisfy  their  accounts as
          originally  contemplated at the time of sale and charges actual losses

                                       23
<PAGE>
          to the allowance when incurred.  The calculation for these  allowances
          is  based  on the  detailed  review  of  certain  individual  customer
          accounts,  historical  satisfaction rates and the Company's estimation
          of the overall economic  conditions  affecting the Company's  customer
          base. If the financial  condition of the Company's  customers  were to
          deteriorate,  resulting  in an  impairment  of their  ability  to make
          payments, additional allowances may be required.

          Income taxes

          As  part  of the  process  of  preparing  our  consolidated  financial
          statements  we are required to prepare our income taxes in each of the
          jurisdictions in which we operate.  This process  involves  estimating
          our actual  current tax exposure  together  with  assessing  temporary
          differences  resulting from  differing  treatment of items for tax and
          accounting  purposes.  These differences result in deferred tax assets
          and liabilities,  which are included within our condensed consolidated
          balance sheet.  We must then assess the  likelihood  that our deferred
          tax assets will be  recovered  from future  taxable  income and to the
          extent we believe  that  recovery is not likely,  we must  establish a
          valuation allowance. We have fully reserved our deferred tax assets at
          March  31,  2007  and  June  30,  2006.  If  expectations  for  future
          performance,  the timing of deductibility of expenses, or tax statutes
          change  in the  future,  we  could  decide  to  adjust  the  valuation
          allowance, which may increase or decrease income tax expense.

          Stock-based compensation

          We apply SFAS 123(R) to account for stock-based employee  compensation
          plans.  This  statement  requires that we measure the cost of employee
          services received in exchange for an award of equity instruments based
          on  the  grant-date  fair  value  of the  award.  That  cost  is to be
          recognized  over the period  during  which the employee is required to
          provide  service  in  exchange  for the  award.  Changes in fair value
          during  the  requisite   service   period  are  to  be  recognized  as
          compensation cost over that period.

          Goodwill and other intangible assets

          We evaluate the  recoverability  of goodwill and other  intangibles of
          each of our  reporting  units as required  under SFAS 142 by comparing
          the fair value of each  reporting  unit with its carrying  value.  The
          fair values of our reporting units are determined  using a combination
          of a discounted  cash flow  analysis and market  multiples  based upon
          historical  and  projected  financial  information.  We apply our best
          judgment   when   assessing  the   reasonableness   of  the  financial
          projections used to determine the fair value of each reporting unit.

                                       24
<PAGE>
          Nine months ended March 31, 2007 and 2006

          Revenue

          Revenue decreased to $13.3 million for the nine months ended March 31,
          2007, compared to $16.9 million for the same period in the prior year.
          The  decrease in revenue is  primarily  attributable  to a decrease in
          Voice Services segment of approximately  $3.9 million partially offset
          by an increase in the MSC segment of $0.3 million. The decrease in the
          Voice Services segment was attributable to customer attrition and rate
          concessions  of  approximately  $3.9  million.   Swift  accounted  for
          approximately  $1.7  million of the Voice  Services  attrition  in the
          current  period.  During the nine months ended March 31,  2007,  Swift
          Transportation  contributed none of the Company's  overall revenues in
          the current  period as compared to 14% in the same period in the prior
          year. The contract with Swift terminated effective June 30, 2005.

          Cost of revenue (excluding depreciation and amortization)

          Cost of revenue  decreased  to $8.9  million for the nine months ended
          March 31, 2007  compared  to $11.0  million for the same period in the
          prior  year.  Cost  of  revenue  within  the  Voice  Services  segment
          decreased to $4.7 million compared to $7.3 million for the same period
          in the prior year. This decrease is primarily attributable to customer
          attrition  in the  current  period.  Cost of  revenue  within  the MSC
          segment  increased  to $4.2  million  compared to $3.7 million for the
          same period in the prior year. This increase is primarily attributable
          to the  addition of new  customers  and an  increase  in  nonrecurring
          charges.

          General and administrative

          General and administrative expenses were $3.5 million and $4.2 million
          for the nine months  ended March 31, 2007 and 2006  respectively.  The
          decrease in general and administrative expenses were due to a decrease
          in payroll of $0.7  million,  a decrease  in  accounting  fees of $0.1
          million and a decrease in related  cost  reductions  of  approximately
          $0.2 million  offset by an increase in legal fees of $0.1 million,  an
          increase in non cash equity  compensation of $0.1 million and non cash
          equity consulting of $0.2 million from the prior period.

          Engineering and development

          Engineering and development expenses decreased to $0.1 million for the
          nine months  ended March 31,  2007,  compared to $0.4  million for the
          same  period  in the prior  year.  The  decrease  in  engineering  and
          development  expenses were primarily  attributable to staff reductions
          and associated  engineering and development  expenses of approximately
          $0.3 million.

          Sales and marketing

          Sales and  marketing  expenses  decreased to $2.4 million for the nine
          months  ended March 31,  2007,  compared to $3.5  million for the same
          period in the prior year. The decrease in sales and marketing expenses
          was primarily  attributable  to staff  reductions  which resulted in a
          decrease in payroll and payroll related expenses in the amount of $0.8
          million,  a decrease in associated sales and marketing expenses in the
          amount of $0.1 million, a decrease in consulting and professional fess
          in the amount of $0.1 million,  a decrease in equity consulting in the
          amount of $0.1  million  offset by an increase in bad debt  expense in
          the amount of $0.1 million.

          Other income (expenses)

          Other  income  (expenses)  was $0.0  million for the nine months ended
          March 31,  2007  compared  to $.4  million  for the same period in the
          prior  year.  Other  income  for the same  period  in the  prior  year
          consisted of $0.1 million  related to the  reduction in short and long
          term  notes  payable  associated  with  the  acquisition  of the  ECCI
          customer list (see Note 7 to the  consolidated  financial  statements)
          and reduction in accrued expenses in the amount of $0.3 million.

                                       25
<PAGE>
          Three months ended March 31, 2007 and 2006

          Revenue

          Revenue decreased to $4.3 million for the three months ended March 31,
          2007,  compared to $5.3 million for the same period in the prior year.
          The decrease in revenue is attributable to our Voice Services  segment
          where  revenue  decreased  $1.3 million,  partially  offset by revenue
          growth in the MSC segment of approximately $0.3 million.  The decrease
          in the Voice Services segment was  attributable to customer  attrition
          of $1.3 million.

          The decrease in Equipment and Consulting was nomin

          Cost of revenue (excluding depreciation and amortization)

          Cost of revenue  decreased  to $3.0 million for the three months ended
          March 31,  2007,  compared to $3.5  million for the same period in the
          prior year. The decrease is  attributable to reduced cost in the Voice
          Services segment of approximately  $1.0 million due to lost customers.
          Cost of  revenue  within the MSC  segment  increased  to $1.5  million
          compared to $1.0  million  for the same period in the prior year.  The
          $.5 million increase is primarily  attributable to the addition of new
          customers and the increase in nonrecurring charges associated with the
          new customers.

          General and administrative

          General and administrative  expenses decreased to $0.9 million for the
          three months  ended March 31,  2007,  compared to $1.1 million for the
          same period in the prior  year.  The  decrease  was the result of cost
          cutting  initiatives  of  payroll  and  payroll  related  expenses  of
          approximately  $0.25  million  offset by an  increase in legal fees of
          approximately $0.05 million from the prior period.

          Engineering and development

          Engineering  and development  expenses  decreased to $0.04 million for
          the three months  ended March 31,  2007,  compared to $0.1 million for
          the same period in the prior year.  The  decrease in  engineering  and
          development  expenses were primarily  attributable to staff reductions
          and related cost of approximately $0.06 million.

          Sales and marketing

          Sales and marketing  expenses  decreased to $0.7 million for the three
          months  ended March 31,  2007,  compared to $0.9  million for the same
          period in the prior year. The decrease in sales and marketing expenses
          was primarily  attributable  to staff  reductions  which resulted in a
          decrease in payroll and payroll related expenses in the amount of $0.3
          million  offset by an  increase in bed debt  expense of  approximately
          $0.1 million compared to the same period in the prior year. .

          Other income (expenses)

          The  decrease in other  income  (expenses)  for the three months ended
          March 31,  2007  compared  to the same  period  in the prior  year was
          nominal.

                                       26
<PAGE>
          Liquidity and Capital Resources

          Our  operating  activities  used cash of  approximately  $1.2  million
          during the nine months ended March 31, 2007,  as compared to cash used
          of  approximately  $2.4 million for the same period in the prior year.
          Cash used in  operations  for the nine months ended March 31, 2007 was
          primarily attributable to a net loss of approximately $2.5 million, an
          increase in accounts  receivable of  approximately  $0.3  million,  an
          increase in inventories of  approximately  $0.01, an increase in other
          assets of approximately $0.05 million, an increase in deferred revenue
          of  approximately  $0.6 million,  partially offset by non-cash charges
          for depreciation and  amortization,  equity  compensation and bad debt
          expense of approximately $0.6 million,  $0.4 million and $0.4 million,
          respectively.   Additionally,   accounts  payable  decreased  by  $0.3
          million.  Cash used in operations  for the nine months ended March 31,
          2006 was primarily  attributable to a decrease in accounts  payable of
          approximately   $0.3  million,  a  decrease  in  deferred  revenue  of
          approximately  $0.1  million and other  income of  approximately  $0.4
          million,  partially  offset by non-cash  charges for  depreciation and
          amortization,   equity   compensation   and  bad   debt   expense   of
          approximately   $0.7   million,   $0.1   million  and  $0.3   million,
          respectively.  Additionally, accounts receivable, prepaid expenses and
          inventory decreased by approximately $0.3 million.

          Our investing activities used approximately $ 0.1 million for the nine
          months  ended March 31, 2007 as compared to using $0.1 million for the
          same period in the prior year.  Cash used in investing  activities was
          primarily  attributable  to  payments  on  customer  lists  previously
          acquired  in the  amount  of $0.1  million.  Cash  used  by  investing
          activities  for the nine months  ended March 31, 2006,  was  primarily
          attributable to payments on customer lists previously  acquired in the
          amount of $0.1 million and  purchases of property and equipment in the
          amount of approximately $0.03 million.

          Our financing  activities provided  approximately $0.1 million for the
          nine  months   ended   March  31,   2007  as  compared  to   providing
          approximately $0.6 million for the same period in the prior year. Cash
          provided by financing  activities  was  attributable  to proceeds from
          debt  financing  in the  amount  of $0.1  million.  Cash  provided  by
          financing  activities  for the nine  months  ended  March 31, 2006 was
          attributable  to an  advance  from a  shareholder  and debt  financing
          offset by NASDAQ listing fees and cost associated with debt financing.

          Going Concern Uncertainty

          Historically,  we have experienced significant recurring net operating
          losses as well as negative cash flows from operations. Our main source
          of liquidity has been equity and debt  financing,  which has been used
          to fund continuing losses from operating activities. Based on our cash
          position of approximately $.8 million, and further taking into account
          ongoing  litigation  expenses as well as the current maturity dates of
          our long term debt, we believe we may not have sufficient cash to meet
          our  funding  needs  through  March 31,  2008.  Our  ability  to raise
          additional  capital to fund  operations  also has been impaired by (a)
          existing  litigation  and (b) our current  stock price and the adverse
          effect of the issuance of low priced stock caused by the anti-dilution
          provisions  of  our  outstanding  preferred  stock.   Management  will
          continue  our  cost  reduction  efforts  as well  as  seek  additional
          financing to  restructure  our current debt.  However,  based upon the
          issues  discussed  herein,  there can be no assurances that we will be
          able to raise additional  capital,  reverse our operating loss or cash
          flow  deficiency,  or that we will  be  able  to  satisfy  our  future
          obligations.  These factors raise  substantial doubt about our ability
          to continue as a going concern.

                                       27
<PAGE>
ITEM 3 - CONTROLS AND PROCEDURES

     CEO and CFO Certifications
     --------------------------

     The  certifications  of the CEO and the CFO  required  by Rules  13a-14 and
     15d-14  of  the   Securities   Exchange  Act  of  1934,   as  amended  (the
     "Certifications") are filed as exhibits to this report. This section of the
     report contains the information concerning the evaluation of our disclosure
     controls and  procedures  (as defined in Exchange Act Rules  13a-15(e)  and
     15d-15(e))  ("Disclosure  Controls")  and changes to internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) ("Internal Controls") referred to in the Certifications and this
     information  should be read in conjunction  with the  Certifications  for a
     more complete understanding of the topics presented.


     Evaluation of Disclosure Controls and Procedures

     The Company maintains controls and procedures designed to ensure that it is
     able to collect the  information  that is required to be  disclosed  in the
     reports it files with the SEC, and to process,  summarize and disclose this
     information  within the time period  specified in the rules of the SEC. The
     Company's Chief Executive and Chief Financial  Officers are responsible for
     establishing,  maintaining  and enhancing these  procedures.  They are also
     responsible,  as  required  by the rules  established  by the SEC,  for the
     evaluation of the effectiveness of these procedures.

     Based on our management's  evaluation (with  participation of our principal
     executive officer and principal  financial  officer),  as of the end of the
     period  covered  by  this  report,  our  principal  executive  officer  and
     principal financial officer have concluded that its disclosure controls and
     procedures were effective.


     Changes in Internal Controls Over Financial Reporting

     We maintain a system of internal  controls  designed to provide  reasonable
     assurance that  transactions  are executed in accordance with  management's
     general or specific  authorization;  transactions are recorded as necessary
     to permit preparation of financial  statements in conformity with Generally
     Accepted  Accounting  Principles  (GAAP) and  maintain  accountability  for
     assets.  Access to assets is permitted only in accordance with management's
     general or specific authorization.

     During the prior  reporting  period  ending  December  31, 2006  management
     concluded that a deficiency was  identified  which  constituted a "material
     weakness".  Accordingly,  management  implemented  changes  to  remedy  the
     circumstances  that  created  the  deficiency  and has  concluded  that the
     condition no longer exists.

     It is the  responsibility  of management to establish and maintain adequate
     internal controls over financial reporting.  During the quarter ended March
     31, 2007,  management  reviewed all systems and procedures  relating to the
     financial close and assessed the proficiency of the staff  previously hired
     and trained during the fiscal year.  Management  trained  previously  hired
     staff to perform  duties and utilize  processes  and controls as originally
     designed.  As a result  management  was able to timely  review the required
     analytical schedules and memorandums.  In addition, based on the timeliness
     of the  review  process  the  Company  was  able to  collect  the  required
     information  to be  disclosed  in the  reports  filed  with  the SEC and to
     process,  summarize  and disclose this  information  within the time period
     specified by the SEC.

                                       28
<PAGE>
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On April  24,  2006,  the  Company's  subsidiary  NetWolves  ECCI Corp (the
     "Subsidiary")  filed an action in the Florida  Circuit Court,  Hillsborough
     County against Education Communications Consortia Inc. ("ECCI"). The action
     arises from ECCI's breach of the October 1, 2004 Asset  Purchase  Agreement
     between the parties (the "Agreement") by failing to pay $70,273 pursuant to
     a reconciliation  of billings,  receivable and costs in accordance with the
     terms of the Agreement.

     On April 27, 2006, ECCI served the Company and Subsidiary with an action in
     the Circuit Court of Kanawha County, West Virginia,  alleging,  inter alia,
     that the Subsidiary  had failed to pay the $200,000 first  installment of a
     promissory note ("the Note") and has anticipatorily breached payment of the
     remaining balance. As a consequence,  ECCI alleges that the entire $800,000
     note,  together  with  interest and costs,  is joint and  severally due and
     payable by the  Subsidiary and by the Company,  as guarantor.  ECCI asserts
     additional claims against the Company in the aggregate sum of approximately
     $121,000 based on alleged reimbursable costs incurred by ECCI.

     The Company and Subsidiary  believe that ECCI's action is without merit and
     therefore no accrual has been made. Among other things, it is the Company's
     position  that the  Agreement  provided  as a  condition  precedent  to any
     installment  payment  that ECCI achieve  annual  gross  revenue of at least
     $2,000,000; and that ECCI failed to achieve this amount. However, there can
     be no assurances that the Company will be successful.

     On November  16,  2006,  Mr.  Groteke  through his  counsel,  informed  the
     Company,  by written notice as required by his employment  agreement,  that
     Mr. Groteke was resigning from the Company for "good reason," as defined in
     the employment  agreement;  that the letter  constituted  his 15-day formal
     notice,  making his  resignation  effective  December 1, 2006; and that Mr.
     Groteke  was  demanding  all  compensation  and  benefits  set forth in the
     agreement through June 30, 2010, the remainder of its term.

     On November  21,  2006,  the Company  through its counsel  responded to the
     November  16th  letter by denying  that Mr.  Groteke  had any basis for his
     claims,  stating among other things, that Mr. Groteke remained Chairman and
     CEO with all of his responsibilities inherent in these positions. By letter
     dated November 28, 2006, Mr. Groteke's counsel affirmed his prior position.

     On  December 6, 2006,  the  Company  was served with an action  against the
     Company  by Mr.  Groteke  in the  Circuit  Court of the  State of  Florida,
     Hillsborough  County seeking declaratory relief and a judgment for his full
     compensation  and benefits under the employment  agreement,  on the grounds
     previously set forth.

     The  Company  believes  that Mr.  Groteke's  action  is  without  merit and
     therefore no accrual has been made.  Among other things it is the Company's
     position that Mr. Groteke voluntarily resigned and is no longer entitled to
     compensation set forth in his employment agreement.


ITEM 2. CHANGES IN  SECURITIES  AND SMALL  BUSINESS  ISSUER  PURCHASES OF EQUITY
        SECURITIES

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not  applicable

                                       29
<PAGE>

ITEM 5. OTHER INFORMATION

     Not applicable.


ITEM 6. EXHIBITS

     31   CEO  and  CFO   certifications   pursuant   to  Section   302  of  the
          Sarbanes-Oxley Act of 2002.

     32   CEO  and  CFO   certifications   pursuant   to  Section   906  of  the
          Sarbanes-Oxley Act of 2002.


                                       30
<PAGE>



SIGNATURES

     Pursuant to the  requirements  of the Exchange Act, the Registrant has duly
     caused this report to be signed on its behalf by the undersigned, thereunto
     duly authorized.




                                 BY:      NETWOLVES CORPORATION





                                         /s/ Michael R. Rocque
                                         ------------------------
                                         Michael R. Rocque
                                         Chief Executive Officer and Director




                                          /s/ Peter C. Castle
                                         ------------------------
                                         Peter C. Castle
                                         Chief Financial Officer,
                                         Vice President-Finance,
                                         Director, Treasurer and Secretary





Date: May 14, 2007



                                       31